Understanding the Correlation Between ADR and RevPAN

I thought it would be appreciated to review the Average Daily Rate (ADR) and RevPAN and understand the correlation between them.

But first lets review 3 Terms. Occupancy, ADR and RevPAN.

Occupancy.

Occupancy means how many nights you were booked a month. 50% means 15 nights out of the month, 75% means 22.5 nights, and 90% occupancy is 27 nights.

ADR

ADR is an acronym for average daily rate.

Say a listing in your market is booked for 20 nights a month on average, 10 nights at $50 and 10 nights at $100. The average daily rate for the 20 nights booked is $75. The total combined revenue earned for the month is $1,500.

REvPAN

RevPAN refers to  Revenue Per Available Night.

(RevPan is a borrowed term from the hotel industry that uses the term RevPar Revenue per available room).

Now that we know what our average daily rate is, what if I asked you to tell me how much you potentially would make per night? $75 was the average for the 20 nights that were booked this month. This did result in a monthly revenue of $1500. 

However if you were to take the $1500 and divide it over the month of 30 days, you would get the number per night that you REALLY  earned. It is less than $75 a night because you averaged out the daily rate only on the nights that you were actually booked. If you were to take into account the 10 additional nights that you could have booked, you would be at a lower nightly rate of $50 a night. 

This is calculated as $1500/30 (nights) = $50 a night. OR you can calculate it by the average daily rate multiplied by your occupancy. 20 booked nights will put you at a 66% occupancy rate. 20/30=66. Your occupancy rate of 66 times your average daily rate of $75 would be 75X.66=49.5.

Your RevPAN will always be lower than your average daily rate unless your occupancy is 100%. In that case, it would be the same as the ADR.

There are two ways to increase your RevPAN. You can either drop your rates and thereby get more bookings resulting in a higher occupancy rate. Or you can increase your ADR and get fewer bookings. If the RevPAN stays the same in either scenario that means that your pricing strategy did not affect your monthly revenue. You will know that you made a good decision when your RevPAN increases. That's when you know that you are getting more revenue for the month. You might be pricing lower, but the higher occupancy is working in your favor and increasing your revenue.

I hope this clears up the difference between ADR and RevPAN and how occupancy rates and RevPAN are correlated.